The Rise and Stumble of a Grey Market Upstart

It has been a wild ride over the past 12 months for Australian luxury e-commerce player, Cettire.

Founded in 2017 by Dean Mintz, who self-funded the grey market platform for much of its life and serves as its chief executive, Cettire works with third-party wholesalers in Europe to sell luxury goods at VAT-exempt prices. By the end of 2020, it was listed on the Australian Stock Exchange after raising $65 million Australian dollars ($50 million) in a December IPO.

That, in itself, is quite the climb, but the months that followed saw Cettire’s share price rise a staggering 570 percent, reaching a high point of $2.85 Australian dollars ($2.19) on June 9 (from its listing price of $0.50 Australian dollars, or $0.38), representing a market capitalisation of over a billion Australian dollars.

The company, which sells a vast array of luxury brands including Prada, Burberry and Gucci on its namesake site, has forecast sales revenue of $85 million Australian dollars ($65.38 million) for its full year ending June 30, 2021 and predicted it will make a small profit over the same period.

“The business has been under-the-radar, pretty misunderstood in Australia; no-one’s really heard about it,” said Ron Shamgar, head of Australian equities at Tamim Asset Management.

I would argue that a billion-dollar valuation for where they are at now is overvalued.

The turning point came, he explained, following Cettire’s positive half-yearly report in February, at which point investment-focused bloggers and social media accounts began talking up the stock.

“I would argue that a billion-dollar valuation for where they are at now is overvalued and there was probably a lot of hot money chasing it in a very short period of time,” Shamgar added.

After that rise, came the fall. On Tuesday, Cettire’s shares halted trading after falling over 30 percent early in the day.

The sudden shift in investor sentiment is thought to have stemmed from a weekend article in business publication, The Australian Financial Review, which highlighted systemic risks in Cettire’s business model.

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Like Italist and other digital grey market players, Cettire appears to have no direct relationship with luxury brands, relying instead on third-party retailer inventory to sell discounted luxury goods.

Sourcing from third parties in Europe and drop-shipping to markets such as the US and Asia (where the bulk of Cettire’s customer base is) means customers are paying the price Europeans pay for goods, rather than their local price, which is often 20 to 30 percent higher because of tariffs and duties applied to imported luxury products.

It’s this price differential that has long driven the parallel import daigou market in China. Although brands have worked to harmonise some prices across geographies, there remain some differences that are exploited by grey market resellers.

Currently, for example, Burberry’s large logo graphic cotton canvas society tote is listed at $1,290 on its own US e-commerce site, but the price on Cettire is $958, a saving of around 25 percent.

According to The Australian Financial Review report, Cettire allegedly blocks IP addresses originating from parts of Europe, including France and Italy, preventing brand representatives from within those countries easily seeing the products and prices it offers.

BoF reached out to Cettire for comment but did not receive a reply prior to publication.

Cettire’s own IPO prospectus lists as a potential risk the fact that the luxury brands it sells could crack down on their wholesale network, jeopardising the platform’s supply of goods.

The company addressed this concern in a filing to the Australian Stock Exchange following its trading halt, which read in part that it “sources products from a large and diversified network of suppliers, with what it believes is minimal concentration risk.”

Having their own pricing structures undercut by digital grey market players, such as Cettire, would appear to be a major hindrance for luxury brands, but little progress seems to be have been made to rein them in despite it being a point of discussion among industry leaders for years.

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Back in 2017, Vetements co-founder, Guram Gvasalia, criticised the luxury industry for its compliance with the grey market as a way to boost sales, calling the practice the sector’s “dirty secret.”

Bernstein’s Luca Solca has estimated the grey market for luxury goods accounts for five to 10 percent of its total global value, which this year is expected to be worth €250 to €295 billion ($303 to 357 billion) according to latest estimates from Bain and Co.

The fact that a grey market player is now public and could be well capitalised seems like an existential threat to the luxury industry in a way.

Many major luxury brands are said turn a blind eye to such sales to boost revenues. One senior fashion insider close to several of the largest global luxury houses described it to BoF in 2018 as a “tap” that brands open or close, depending on their sales targets.

Tommy Mathew, a US-based e-commerce professional who has worked with fashion brands including Acne Studios, has been following Cettire’s rise. Mathew said the fact that the luxury industry has let the digital grey market space grow to its current extent, where companies are going public during the pandemic, is “mind-boggling”.

“The fact that a grey market player is now public and could be well capitalised seems like an existential threat to the luxury industry in a way,” he added.

Brands listed on Cettire, including Prada, Burberry and Gucci were contacted by BoF for comment but either declined or did not respond prior to publication.

“It seems kind of cynical in a way. [Grey market operators] think the brands can’t deal with it, but I actually think they can,” Mathew said. “It’s damaging for the business interests of brands who are really starting to focus on e-commerce in a global way… with the sales volume [Cettire] are doing, this will be the difference of millions of dollars for some brands.”

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Ron Shamgar points out that Cettire’s impressive growth in customer acquisition, especially over the past 12 months, has been largely driven by a reliance on beating competitors on price on Google’s shopping comparison search results.

“The biggest issue is when you are competing mostly on price; I don’t believe that’s scaleable over the long term. If they keep growing at this rate they will have to do deals with the brands and that means they will have similar margins to their direct competitors,” he said.

Other investors are still looking at the positives of Cettire’s business model, which is incredibly streamlined, with only 20 to 30 staff, highly automated and capitalises on an already considerable, but still growing demand for luxury e-commerce.

“We were attracted to the company’s exceptional growth rate of greater than 500 percent at the time of the IPO, founder-led management team, and a globally scalable, capital-light business model in the large personal luxury goods market,” Jessica Farr-Jones, a portfolio manager for the Regal Emerging Companies Strategy, told The Australian Financial Review.

In the near future, Cettire could pivot, adopting a business model akin to that of Farfetch, or make other adjustments to work directly with luxury brands — though both spaces are highly competitive.

If it doesn’t, with brands’ own e-commerce revenue growing since the pandemic and pressure to sell more via direct-to-consumer channels which diminishes wholesale both online and offline, there is certainly a risk that Cettire’s business will come under increasing scrutiny.

In any case, it has grown too big, too fast to stay under-the-radar much longer.

Related Articles:

Brands Beware: The Digital Grey Market Is Growing

Is It Game Over for China’s Grey Market Sellers?

Fashion’s Dirty Secret: Millions in Grey Market Sales

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